Personas con discapacidad Personas con diversidad funcional

Index to the Appendix

Introduction

The case study company

The framework of the Doing Business study

The PricewaterhouseCoopers Total Tax Contribution (‘TTC’) framework What is a tax?

Payments in respect of labour Taxes borne and collected

Introduction

The Paying Taxes indicator is one of ten indicators assessed as part of the World Bank – IFC’s annual Doing Business report which, this year, was published on 10 September 2008. This is the fourth year in which tax data has been collected as part of the Doing Business project.

The Paying Taxes study involves gathering information on the tax affairs of a standard case study company in 181 economies, by reviewing the financial statements and a list of transactions of a standard modest‑ sized firm. This information is used to generate three indicators related to the number of tax payments, the time taken to comply with its tax affairs, and the total tax cost. These are equally weighted to produce an overall ranking for each economy for the ease of paying taxes. Rankings of each of the individual components are also available. All the rankings are included in Appendix 1, and further details for each economy are available at www.doingbusiness.org The World Bank‑IFC report has this year also collected additional data which, whilst not used to determine a country’s ranking, assists with understanding the tax system in each country. Some of this additional data is referred to in this publication.

This appendix includes detailed information on the methodology behind the collection of data for the main indicators and the fundamental distinction between taxes borne and taxes collected. It also explains more about the PricewaterhouseCoopers Total Tax Contribution methodology (basic principles of which are incorporated in the design of the Doing Business paying taxes indicator) and some of the matters that must be considered when deciding what payments should be included when considering the tax burden of a company.

The case study company

In order to gather the necessary information to generate the tax indicators mentioned for the

standardised business in each country, a case study company has been developed. The case study company is a domestic flower pot manufacturer and retailer. Nothing hangs specifically on the nature of the business; it has been chosen as something that can be readily understood worldwide and as an activity that involves both manufacture and retail of a low‑technology product. The overriding objective is to generate a standard fact pattern so that the tax indicators generated using the same criteria can be compared across so many countries without being significantly distorted by industry specific incentives and reliefs. It is also specified to be a domestic

operation in the economy, so the assessment is purely of the local tax system.

The company has a set of financial statements and comparability is assisted by detailed assumptions made with regard to the company’s operations, staff, transactions, size, etc, as well as the process by which the information is gathered and reviewed.

The facts and assumptions allow the World Bank to generate tax indicators for each economy, based on the application of their tax rules to the case study company.

Tax advisers from PricewaterhouseCoopers provided tax technical data for their economies; other advisers provided data where PricewaterhouseCoopers does not have a presence. The data provided is based on the standardised case study facts and assumptions and on the tax rules applying for the year from 1 January to 31 December 2007. While the basic elements of the case study do not change year on year, the period for which the rules are deemed to apply is updated.

The framework of the Doing Business study The Doing Business ‘paying taxes’ data records the taxes and mandatory contributions that a modest‑ size company must pay in a given year, as well as measures of the administrative burden of paying taxes and contributions. Taxes and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes and vehicle and road taxes.

Doing Business measures all taxes and contributions that are government mandated (at any level – federal, state or local), apply to the standardised business and have an impact in its income statements. In doing so, Doing Business goes beyond the traditional definition of a tax: as defined for the purposes of government national accounts, taxes include only compulsory, unrequited payments to general government. Doing Business departs from this definition because it measures imposed charges that affect business accounts, not just government accounts. The main differences relate to certain labour contributions. The Doing Business paying taxes data includes government‑mandated contributions paid by the employer to a requited private pension fund or workers’ insurance fund. The indicator includes, for example, Australia’s compulsory superannuation guarantee and workers’ compensation insurance.

Assumptions about the business

The business

• Is a limited liability, taxable company. If there is more than one type of limited liability company in a country, the limited liability form most popular

among domestic firms is chosen. The most popular form is reported by incorporation lawyers or the statistical office.

• Started operations on 1 January 2006. At that time it purchased all the assets shown in its balance sheet, and hired all its workers.

• Operates in the economy’s largest business city. • Is 100 percent domestically owned and has five owners, all of whom are natural persons (resident for tax purposes in the economy).

• Has a start‑up capital of 102 times income per capita at the end of 2006.

• Performs general industrial and commercial activities. Specifically, it produces ceramic flowerpots and sells them at retail. It does not participate in foreign trade (no import or export) and does not handle products subject to a special tax regime, for example, alcohol or tobacco.

• At the beginning of 2007, the company owns two plots of land, one building, machinery, office equipment, computers and one truck. Another truck is leased.

• Does not qualify for investment incentives or any benefits apart from those related to the age or size of the company.

• Has 60 employees comprising four managers, eight assistants and 48 workers. All of these workers are nationals of the economy and one of the managers is also an owner.

• Has a turnover of 1,050 times income per capita. • Made a loss in the first year of operation.

• Has a gross margin (pre‑tax) of 20 percent (that is, sales are 120 percent of the cost of goods sold). • Distributes 50 percent of its net profits as dividends

to the owners at the end of the second year. • Sells one of its plots of land at a profit during the

second year.

• Has annual fuel costs for its trucks equal to twice income per capita.

• Is subject to a series of other detailed assumptions on expenses and transactions to further standardise the case. All finance statement variables are

proportional to 2005 income per capita. For

example, the owner who is also a manager spends 10 percent of income per capita on travelling for the company (20 percent of this owner’s expenses are purely private, 20 percent are for entertaining customers and 60 percent for business travel).

Assumptions about the taxes and contributions

• The taxes and contributions are those paid in the second year of operation (fiscal year 2007). A tax or contribution is considered distinct if it has a different name or is collected by a different agency. Taxes and contributions with the same name and agency, but charged at different rates depending on the business are counted as the same tax or contribution.

• The number of times the company pays taxes and contributions in a year is the number of different taxes or contributions multiplied by the frequency of payment (or withholding) for each one. The frequency of payment includes advance payments (or withholding) as well as regular payments (or withholding).

The indicators:

Number of tax payments

• The tax payments indicator reflects the total number of taxes and contributions paid, the method of payment, the frequency of payment and the number of agencies involved for this standardised case during the second year of its operation. It includes payments made by the company on consumption taxes, such as sales tax or value added tax. Although these taxes do not affect the income statements of the company, they add to the administrative burden of complying with the tax system and so are included in the tax payments measure.

• The number of payments takes into account electronic filing. Where full electronic filing is allowed and it is used by the majority of modest‑ sized businesses, the tax is counted as paid once a year even if the payment is more frequent.

The case study company has a turnover which is the same multiple of the income per capita for each economy. In absolute terms, therefore, the numbers involved can be different. For example, in the UK, the turnover of the business is assumed to be £21.5m whereas in Argentina turnover is 13,941,603 pesos which at 31 December 2007 (the end of the fiscal year of the survey) equates to £0.4m. In both economiess however, the calculation is the same and based on income per capita. This allows the case study financials to be flexed to reflect the relative wealth of the economy in which it operates. While the turnover is flexed, the gross margin of the company is fixed to the same percentage regardless of the economy in which the company operates.

For taxes paid through third parties, such as tax on interest paid by a financial institution or fuel tax paid by the fuel distributor, only one payment is included even if payments are more frequent. These are taxes withheld at source where no filing is made by the company.

• Where two or more taxes or contributions are paid jointly using the same form, each of these joint payments is counted once. For example, if mandatory health insurance contributions and mandatory pension contributions are filed and paid together, only one of these contributions would be included in the number of payments.

• The UK position is shown below as an example of this methodology.

Time to comply

• Time is recorded in hours per year. The indicator measures the time to prepare, file and pay (or withhold) three major types of taxes and contributions:

• corporate income tax,

• value added or sales tax, and

• labour taxes, including payroll taxes and social security contributions.

• Preparation time includes the time to collect all information necessary to compute the tax payable. If separate accounting books must be kept for tax purposes – or separate calculations made – the time associated with these processes is included. This extra time is included only if the regular accounting work is not enough to fulfil the tax accounting requirements in which case the incremental time required is included. (The time estimated also does not include the time spent developing the entries on tax for inclusion in the statutory accounts).

• Filing time includes the time to complete all necessary tax return forms and make all necessary calculations.

UK example of number of tax payments

World Bank Indicator Actual payments

Corporate income tax 1 2 payments (estimate and top up)

Pay As You Earn 1 14 payments (12 monthly plus 1 top up, plus 1 social

security payment)

Value added tax 1 4 payments quarterly

Business rates 1 10 payments (by direct debit)

Insurance premium tax 1 Tax embedded, paid to third party not government

Fuel duty 1 Tax embedded, paid to third party not government

Landfill tax 1 Tax embedded, paid to third party not government

• Payment time considers the hours needed to make the payment online or at the tax authorities. Where taxes and contributions are paid in person, the time includes delays while waiting. (Payment time can also include analysis of forecast data and associated calculations if advance payments are required).

• It is important to note that the hours to comply measure does not include any time spent on tax audits or inspections, or dealing with tax authority queries. The case study does not include any facts or assumptions which would enable such time to be estimated.

Tax Cost – Total Tax Rate (TTR)

• The TTR measures the amount of all taxes and mandatory contributions borne by the business in the second year of operation, expressed as a percentage of commercial profits. Doing Business 2009 reports the TTR for the fiscal year 2007 (1 January to 31 December 2007). The total amount of taxes borne is the sum of all the different taxes and contributions payable after accounting for deductions and exemptions. The taxes withheld (such as personal income tax) or collected by the company and remitted to the tax authorities (such as sales or value added tax) but not borne by the company are excluded from the TTR (while noting that these still contribute to the compliance indicators; hours and payments). • The taxes and contributions included can be

divided into five categories: ‑ profit or corporate income tax,

‑ social contributions and labour taxes paid by the employer (for which all mandatory contributions are included, even if paid to a private entity such as a requited pension fund),

‑ property taxes,

‑ turnover taxes (and cascading sales taxes as well as other consumption taxes such as irrecoverable VAT); and

‑ other taxes (such as municipal fees and vehicle and fuel taxes).

• This is a comprehensive measure, of all the taxes and contributions borne by business. As such, it differs from the statutory tax rate which merely provides the factor to be applied to the tax base and is more informative and more useful than other measures which, for example, focus only on corporate income tax.

• It is important to note that the profit figure used in the TTR calculation (the commercial profit) is not the conventional figure found in the financial statements of a company, the profit before tax figure (PBT). In computing profit before tax, many of the taxes borne by a company are deductible. In computing commercial profit, these taxes are not deductible and are added back to present a clear picture of the actual profit of a business before any of the taxes it bears in the course of the fiscal year.

• Commercial profits are defined as sales minus cost of goods sold, minus gross salaries, minus administrative expenses, minus other expenses, minus provisions, plus capital gains (from the property sale) minus interest expense, plus interest income and minus commercial depreciation. To compute the commercial depreciation, a straight‑ line depreciation method is applied with the following rates: 0 percent for the land, 5 percent for the building, 10 percent for the machinery, 33 percent for the computers, 20 percent for the office equipment, 20 percent for the truck and 10 percent for business development expenses.

If any of the taxes and contributions are included in ‘other expenses’, then these are added back to the commercial profits figure. Commercial profit amounts to 59.4 times income per capita. • The TTR excludes value added taxes (where not

irrecoverable) because they do not affect the accounting profits of the business – that is, they are not reflected in the income statement.

• The principles used for the tax cost indicator are broadly consistent with the PricewaterhouseCoopers Total Tax Contribution framework methodology. However, PricewaterhouseCoopers in its empirical work calculates TTR including only taxes as defined later in this appendix. Other mandatory contributions such as the Australian superannuation guarantee obligation are excluded. Such payments are usually disclosed by the company in other elements of the Total Tax Contribution framework, together with additional payments made by the company such as contributions to infrastructure costs. These are often required of companies in the extractive industries by economies in which they invest but do not strictly count as taxes.

Ease of Paying Taxes ranking

• The data collected by the Doing Business team is used to generate a system of ranking based on the three indicators:

Steps: the number of tax payments

Time: the number of hours to comply with the company’s tax obligations

Cost: the total tax rate (TTR)

• This three step approach is linked to a broader methodology used by the World Bank in the Doing Business project which requires these three components of Steps, Time and Cost.

• The World Bank‑IFC report ‘Doing Business 2009’ aggregates these three indicators to generate an overall ranking. The aggregation of the indicators gives each indicator an equal weighting.

• Here is one example of how the ranking on the ease of paying taxes is constructed. In Iceland it takes 31 payments, 140 hours and 27 percent of commercial profits to comply with business taxes during one year. In these 3 indicators Iceland ranks in the 52nd, 23rd and 12th percentiles. So Iceland ranks in the 29th percentile – the average of the 3 percentiles – on the ease of paying taxes. By sorting the ease of paying taxes percentile for each economy, the ranking is obtained, which is 32 out of 181 economies in the case of Iceland.

• The data tables in Appendix 1 show this overall ranking, and additionally the ranking for each individual indicator i.e. for the total tax rate, for the time to comply and for tax payments. The appendix also gives a breakdown of the results for each indicator across the main types of taxes.

• The data details on paying taxes can be found for each economy at http:www.doingbusiness.org

The PricewaterhouseCoopers Total Tax Contribution (‘TTC’) framework

The PricewaterhouseCoopers Total Tax Contribution framework was developed with a view to establishing a methodology which enables companies to collect and communicate total tax information in a consistent manner, meeting the needs of their various stakeholders and helping to improve transparency1_.

The framework encompasses all the taxes that are paid by companies and includes, for example, property taxes, labour taxes and contributions, sales taxes and other taxes, as well as corporate income tax. It makes a fundamental distinction between two types of taxes paid by companies: these are known as ‘taxes borne’ and ‘taxes collected’. In essence, taxes borne are those which are a cost to the company, such as property taxes, employer social security and corporate income tax. Taxes collected are where the company is collecting the tax on behalf of the authority, including taxes deducted from employees’ salaries, sales taxes and excise duties. 

The Total Tax Rate indicator which is included in the World Bank Paying Taxes study has been calculated using the principles of the Total Tax Contribution framework. It is important to note that for the

purpose of calculating the TTR, it is only taxes borne